August 14, 2018

The average annualized total return for the S&P 500 index over the past 90 years is 9.8% per year. Even during periods of hyperinflation, like the early 1970’s, the S&P managed to grow by mid-single digits over a five-year period. And for those that bailed out at the low in 1974, after the S&P had declined by 41.1% over an 18-month period, did so at the peril of missing out on the great rally that followed. Over the next two years the S&P gained +37.2% in 1975 and +23.8% in 1976, erasing all the 1973-74 losses.

In fact, going back to the period of 1927-1931 that included the 1929 crash and the two years that followed, only then and the period of 1937-1941 did the stock market lose significant value over a five-year period. During the Great Recession of 2007-2011, the S&P was essentially unchanged. But because the Great Recession is the most recent time when many investors were severely hurt, the time chart shows that jumping out of the market at any time in the past 100 years has been an expensive decision.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

Investors are now trained to think that history will repeat itself, and because the current bull market is about to become the longest ever recorded, the noise level about an inevitable major market correction is way up. I think much of the fear mongering is out of the need for ratings by the financial media because the data simply doesn’t support trying to time the market. It is well documented that the cost of being out of the market is considerably greater than staying in, assuming one has a long-term time horizon.

Just going back 30 years to 1988 and using a hypothetical investment of $100,000 in the S&P 500, those that stayed invested through the 1990 Iraqi invasion of Kuwait, the 1997 Asian economic crisis, the 2000 collapse of the technology bubble, the 9/11 attacks during 2001, Hurricane Katrina in 2005, the failure of the mortgage credit markets in 2008, and the Greece-led European credit crisis and Flash Crash of 2010 have seen that same $100,000 appreciate to $1,907,620.

Those that were out of the market for just the five best days during that 30-year period forfeited almost $700,000 in gains and the numbers get more sobering for those that missed out on the best 10, 15, 20, or 25 days of the 7,920 trading days during that same 30-year period. Imagine missing out on over $1.5 million in total return because of not being in the market for the 25 best days during a 7,920-day stretch.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

There Is No Substitute for Wealth Creating from Dividends

What is even more glaring is seeing how much of the returns were credited to dividends. During that 1988-2017 period if we back out the inclusion of dividends, $100,000 grew to $1,082,000. So, dividends accounted for $825,620 of the total of $1,907,620 or a whopping 43.3% of the total return.

What most people don’t remember is that S&P dividend payments were slashed by an average of 22.6% in 2009, making it the largest decline since a 36.3% slide in 1937. During 2009, there were 21 financial firms in the S&P that slashed or suspended dividends altogether. And yet there were some standout companies that raised their dividends 10% or more that year, so stock selection is always important.

Many investors need the income from dividends so the compounding effect is minimized, but having the right dividend growth stocks that double their dividend payouts on average every seven years is like getting an annual pay raise that keeps up with the pace of household inflation. And for today’s vast majority of investors that have underfunded retirement accounts, buying those stocks that are “A” or “B” rated by Navellier’s Dividend Grader are where investible dollars should be dedicated.

It is no secret that the headwinds of a tighter Fed have weighed on performance. But the winds of change are already at work and as market volatility has started to pick up, rotation into dividend growth stocks and sectors is notable. While technology still leads all sectors YTD, energy, consumer discretion, and healthcare are pushing higher and are also where the fastest growing dividend payouts can be found.

With the 2-year Treasury Note yielding 2.61% as of last Friday’s close, some might view this yield as tempting. While the element of safety is always a nice feature, there are no fundamental signs of an impending recession. Quite the opposite is happening – an economy expanding at a 4%+ pace of growth. Careful stock selection of blue-chip companies paying 3.0%+ yields on qualified dividends that are hiking those payouts by 10% to 20% this year and next should be the center of every income investor’s attention. And don’t try to time the market. Just turn down the noise and enjoy the ride.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. *All content of “Income Mail” represents the opinion of Bryan Perry*

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